ARLINGTON, Va., Feb. 21, 2013- Drought, economic strains and generational transitions will continue to be hot topics for the agriculture industry in 2013, but the sector still remains one of the top strongest in the nation, noted Economic Research Service economists during the 2013 USDA Agricultural Outlook Forum.

ERS projects the consumer food price index to increase 3-4 percent in 2013. ERS Economist Richard Volpe noted that every projection USDA makes is “contingent on drought not being a major factor” in the next year.

Currently, 54 percent of the United States is an area of moderate or worse drought. “More than anything else, this has the potential to change our outlook for 2013 and beyond,” Volpe said.

While modest food price inflation is expected this year, Volpe noted that the increase will not be as dramatic as previous years with high inflation. “It's not good news, but we're not looking at any dramatic or historical spike in retail food prices,” he said. “This all hinges on the drought not exacerbating the situation for planting and harvesting.”

Volpe noted that one third of the corn yield lost in the 2012 drought was taken from animal feed, and with the lowest cattle herd since 1953, beef prices are guaranteed to rise. He also noted an expected rise in poultry prices, due to greater demand from consumers shifting from beef and poultry's high input costs.

Although consumers will see a difference in food prices in the supermarket this year, Volpe noted that commodity prices are 10 times more volatile than retail food prices. To compare, he explained that the oil market is just 6-7 times more volatile than retail food prices.

In 2011, the average commodity price increased 40 percent, but retail food price increased about 3.8 percent. Commodity prices and retail food prices generally move in same direction, but the degree of movement is much larger for commodities, he noted. “In 2013, we're looking at similar a story we saw in 2011.”

For the restaurant business, Unified Foodservice Purchasing Co-op's Kurt Collins noted that beef products will be difficult to manage due to higher prices. “Many in the restaurant industry are promoting fish items and chicken items,” he said. “Beef items are being less promoted.”

Part of the problem for the beef industry is that feed costs make up over half of the expenses, noted ERS Economist Kevin Patrick. Overall for the agricultural industry, Patrick said feed costs will increase six percent in 2013. Other high expenses include a labor cost increase over 10 percent and a rental expense increase also around 10 percent, he explained.

However, high agricultural exports will continue to support farm income. 2013's net farm income, forecast at $128.2 billion, is expected to be the highest since 1973. Net cash income--which measures the difference between cash expenses and the combination of commodities sold during the calendar year plus other sources of farm income--is forecast at $123.5 billion, down almost 9 percent from 2012.

This is the first time net cash income will fall below farm income since 2004, Patrick noted.

ERS states that, even with the decrease, 2013's forecast would be the fourth time net cash income, after adjusting for inflation, has exceeded $100 billion since 1973.

CoBank's Terry Barr discussed the industry's long-term outlook, noting that overall economic growth will continue to be subdued over the next five years. However, he said to “expect a new energy paradigm” with the emergence of fracking and increased natural gas.

Increasing domestic energy output and rebuilding grain stocks will have significant implications for the agricultural sector in the long-term, he noted.

Barr also said the difference between U.S. crop prices and livestock prices are not sustainable. While the meat and dairy sectors managed to maintain feed use until the next crop, “they can't continue that over a sustained period,” he said. “Meat prices have to go up or grain has to go down.”

Transitioning to the next generation

The biggest question for farm household well-being is how the next generation will transition to operating American agriculture, said ERS Economist Mary Ahearn.

“The younger generation needs land, capital and lessons from older generation,” she said. “It's less clear what the older generation wants and needs in the transition process out of agriculture.”

Senior farmers, those aged 65 and older, make up 32 percent of principal operators. Part of the retirement income for many senior farmers is the Conservation Reserve Program, Ahearn noted. Half of the CRP acres are owned by seniors.

Ahearn said the total number of beginning farmers have been declining since 1982, but highlighted notable transition within the operator group. “Something people are surprised at is only 14 percent of beginning farmers are under 35,” she said. Only one percent of established farmers are under 35 years old.

“And those under 35 tend to operate larger farms,” she said. “When they can be in operation they are starting at a larger scale.”

She said younger farmers most likely have more acres because they are the ones inheriting land from retired established farmers. Nearly half of the beginning farmers are 35-49 years old, Ahearn said. This is a likely result of young people not having access to enough capital, unless they are able to inherit.

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